tradeandtaxes

Thursday, December 24, 2009

Writing in the December 1 Huffington Post, Kenneth N. Davis, former US Assistant Secretary of Commerce and IBM CFO proposed an actual solution to our economic problems which would get to the heart of the problem. He wrote:

Legislation For a "Level Playing Field": Effective legislation is the surest way to force action on any big national problem. The best plan developed for fairer competition with foreign importers in our domestic market is draft Senate bill S.3899 "The Balanced Trade Restoration Act of 2006", sponsored by Senators Dorgan and Feingold. It lacked enough support to pass when the economy seemed O.K. in 2006. But now with our jobs and deficit situation so serious, updated legislation could attract wide bipartisan support for fast enactment.

Passing S.3899 is especially important if more stimulus money is spent to foster new "green" industries. There's no avoiding foreign competition. For example, Brazil is already supplying many of the large metal blades used in wind power turbines here. S.3899 will assure a competitive market where US producers can reopen and new companies thrive, with both providing good jobs. It will also cause US companies to reconsider the off-shoring of work to supply the US market. Under S.3899, all items brought in from abroad would have new import costs to enter the US that they won't incur if the work is done here.

Not "Protectionist" or "Anti-Globalization" and is Self-funding: No one should view S.3899 as "protectionist" or "anti-globalization". Instead, it's the fairest way to keep our huge market open to all by "leveling the playing field". No industry or country is targeted or favored in S.3899. All imports having the required import certificates are welcome. Certificates of a value equal to our exports will be issued by the U.S. each year and sold in open trading. It's also important that S.3899 is self-funding. It's the only plan being proposed that won't require more government deficit spending, and it will create many thousands of jobs while reducing our trade deficit and excessive borrowing from abroad.

Wednesday, December 23, 2009

The Bureau of Economic Analysis just released its third estimate of real economic growth for the third quarter of 2009:

3.5% - this was the preliminary estimate issued October 29.

2.8% - this was the second estimate issued on November 24.

2.2% - this was the third estimate issued on December 22.

The reasons that the BEA gave for the downward revision from the preliminary estimate to the second estimate were:

The second estimate ... primarily reflecting an upward revision to imports and downward revisions to personal consumption expenditures and to nonresidential fixed investment that were partly offset by an upward revision to exports.

The reasons that the BEA gave for the downward revision from the second estimate to the third estimate were:

The recurring theme was that residential fixed investment was less than estimated. It turns out that real fixed investment (combination of residential and non-residential) in the American economy did not rise from $1632 billion to $1641 billion (in 2005 dollars) as shown in the graph below:

Tuesday, December 22, 2009

I missed this excellent commentary on November 16 when it was published by the Council on Foreign Relations. Essentially, Steven Dunaway argues that the United States has nothing to lose in putting pressure on China. He disputes the four myths that are put forward:

Myth No. 1: Washington has limited leverage because China is the main "banker" for the United States.

Myth No. 2: The United States is heavily dependent on cheap Chinese goods.

China holds a large amount of U.S. government securities. Of China's $2.3 trillion in official reserves, it is estimated that 70 percent is held in U.S. dollar assets. China is a big customer for U.S. debt, but it is not America's banker. Nor is the United States dependent on China to finance its budget deficits. If China elects not to buy U.S. Treasuries, there are other willing public and private sector buyers, as indicated by the strong demand for these securities worldwide. Although the U.S. government might have to pay higher interest rates as an incentive to get other investors to buy Treasuries in the event that the Chinese reduce their demand, the increase in interest rates would likely be small.

Major consequences from a decision by China to reduce its purchases of U.S. Treasury securities would depend on the reason behind the decision. It would be in China's best interest (and beneficial for the rest of the world as well) if China reduced its purchases of U.S. Treasuries because it decided to stop heavily managing its exchange rate and allow greater flexibility in the currency's movements. This is an important policy change that is required if China is going to rebalance its economy and be able to sustain rapid growth.

If instead China continues to heavily manage its exchange rate, it will build up large additional amounts of official reserves. If it decides to hold less of these additional reserves in U.S. Treasury securities, then China will increase its purchases of assets denominated in other currencies, with euro-denominated securities being the most likely alternative. In these circumstances, China would continue to intervene in its exchange market, with the central bank buying U.S. dollars for Chinese renminbi and then selling dollars for euro to acquire European assets. The result would be an appreciation of the euro. Consequently, countries in Europe, not the United States, would probably be most affected by China's move because the negative impact of euro appreciation on European economic activity would likely far outweigh the effects on the United States of smaller Chinese purchases of Treasuries.

Alternatively, China could choose to start dumping its stock of U.S. securities. The result would be appreciation of other major currencies (depending on where China would decide to park its reserve assets); upward pressure on U.S. interest rates; and the possibility of financial market disruptions if China dumped its U.S. dollar assets rapidly. However, the U.S. Federal Reserve could limit the rise in U.S. interest rates and would be able to ensure adequate liquidity to prevent market disruptions. But a decision to dump Treasuries would have a large effect on China itself. The country would incur a substantial capital loss on its reserve assets. The Chinese authorities are deeply concerned about such a loss, and are very unlikely to decide to dump U.S. assets. In fact, the discussion initiated by China regarding the need for an alternative official reserve asset is motivated by its concerns about potential losses on its U.S. dollar holdings.

Our leaders really don't have any excuse for not insisting on balanced trade with China.

Monday, December 21, 2009

The U.N. Climate Control Conference in Copenhagen ended in failure in that no binding agreement was reached to reduce CO2 emissions. China nixed the agreement by refusing to compromise on the issue of international verification as noted by a British newspaper called The Independent:

When the [U.S.] President, in an unyielding speech, said that without international verification "any agreement would be empty words on a page", that was too much for [Chinese Premier] Mr Wen. He left the conference in Copenhagen's Bella Centre, returned to his hotel in the city, and responded with a direct snub of his own - he sent low-level delegates to take his place in the talks.

At the end of the conference, President Obama and leaders of India, Brazil, South Africa, and China negotiated a possible framework for the next conference. In order to be seen as effective, Obama caved in to the demands of the developing countries, which produced the "Copenhagen Accord."

India, Brazil, and South Africa got the reparations they wanted. The developed countries (the U.S., Europe, Japan, etc.) would pay $30 billion by 2012, and $100 billion per year starting in 2020 (U.S. share $10 billion by 2012, about $33 billion per year by 2020), into a fund to be distributed to the developing countries based upon need. The accord states:

The collective commitment by developed countries is to provide new and additional resources, including forestry and investments through international institutions, approaching $30 billion for the period 2010-2012 ... In the context of meaningful mitigation actions and transparency on implementation, developed countries support a goal of mobilizing jointly $100 billion dollars a year by 2020 to address the needs of developing countries.

Meanwhile, China, the world's fastest-growing CO2-polluter, got what it wanted. The accord would let China avoid transparency and international verification by opting out of the reparations. China would generate reports every two years, but only those developing nations receiving reparations would be subject to the transparency requirement in the accord:

Nationally appropriate mitigation actions seeking international support ... will be subject to international measurement, reporting and verification in accordance with guidelines adopted by the Conference of the Parties.

President Obama was changing the terms of the original reparations offer, as announced by his Secretary of State Hillary Clinton on December 17 at the conference. She had told the delegates that the $100 billion per year reparations pledge would apply only if there was an agreement involving "all major economies" with "full transparency":...

Sunday, December 20, 2009

Nobel Prize-winning economist Paul Krugman, in his NYT column (12-18-09), entitled “The Curse of Montagu Norman” reiterates the advice he gave the central bank of Japan to end its decades-long recession that began in the 1990s. Simply put, he urged the Japanese to create inflationary expectations by inflating the currency. It was simplistic advice then and it is the same simplistic advice that he is giving Bernanke now. His argument is:

Right now, real interest rates are too high, on a PPE basis (that’s Proof of Pudding is in the Eating): the economy is clearly operating far below capacity due to insufficient demand. … While real interest rates are too high, however, the short-term nominal rate is as low as it can go. So there are only two ways real rates can be reduced. Either the Fed has to buy long-term assets, driving down the wedge between short and long rates . . . or it needs to raise expected inflation. Or it could and probably should do both.

Simplistic? Yes, indeed. We have no objection, indeed we encourage the Fed, to raise the only rate of interest it controls, the rate of interest it charges banks. It is almost zero, thus enabling the banks to borrow at little or no cost and make tons of money buying U.S. Treasury bonds and notes. This raises the prices of treasuries and lowers the rates of longer-term bonds and notes. Charging the banks a higher rate of interest would encourage them to make more loans to businesses.

But we are not great believers in the importance or usefulness of interest rates as a recovery mechanism. As Keynes wrote, reducing interest rates is like "pushing on a string." There is little demand by businesses for funds for new factories and equipment. What is required to recover from this recession is increased private investment in factories and equipment. That would increase the demand for loans and restore some of the lost industrial jobs.

What long-term assets would Krugman have the Fed buy? Long-term treasuries, corporate bonds, General Motors stock, all of the above? As a matter of fact, that is what the Fed and the banking system have been doing and all that it did so far was to cause a bear-market rally. It created no increased demand for goods and consequently did little to arrest the enormous increase in unemployment and underemployment.

Moreover, it contributed nothing to reduce the trade deficits. Indeed, the decline in our industrial sector continues and unemployment grows. Our companies are investing abroad which is good for employment in China and India, and possibly Brazil, but not the United States.

Prof. Krugman is a Keynesian; he believes in government spending its way out of the recession. So far, all that that has done was to stabilize the banks and investment companies (TARP), increase the number of government employees, and pay for earmarks to supporters, with no increase in employment! Its subsidies to the automobile industry (buying “klunkers”) proved ephemeral. Its subsidies to alternative sources of energy will inflate electrical energy prices, and will cost more jobs than it creates. A study by Gabriel Calzada, economics professor at Madrid's King Juan Carlos University, calculated that Spain lost 2.2 jobs in other industries for every government-subsidized green job that was created.

There is no relationship of Fed Policy and Montagu Norman’s adherence to the gold standard as head of the Bank of England in the 1930s. We have flexible exchange rates not a gold standard. But a system of flexible exchange rates requires that every major country allow its currency to fluctuate. China, Japan, and others have pegged their currencies to the dollar. Keeping the yuan low in relation to the value of the dollar has been of inestimable value to China, not us, facilitating the growth of China’s exports worldwide.

Nor has Prof. Krugman, to my knowledge, advanced any proposals other than inflation as the way to stimulate demand. Inflation doesn’t create demand. It just makes for another stock market bubble and ends in a recession.

So far, Prof. Krugman, an expert in international economics, has made no recommendation respecting U.S. trade policy which would help balance trade except to argue that China’s trade surplus, if it continues to grow, will have disastrous consequences for the world. We’ve been saying that since 2003 and in our book, Trading Away Our Future (2008). Price and wage inflation in the U.S. would reduce our exports and increase our imports and worsen our trade balance.

So far the real loser is the American industrial worker. Every month records a continued decline in industrial employment. The trade deficit in goods in 2008 amounted to over $800 billions, equivalent to 8 million jobs and equal to Pres. Obama’s economic stimulus plan.

Prof. Krugman has not even made mention of environmental economic policies that prevent our drilling for oil and gas on public lands, notwithstanding our continued dependence on oil imports.

Investment in restricting carbon dioxide emissions, Pres. Obama’s latest proposal to create jobs, is much like digging holes and filling them up again. Hundreds of physicists, the unchallenged elite among scientists, are now arguing that CO2 emissions have little to do with global warming. It is the sun’s emissions and rate of cosmic ray influx that cause global warming and cooling. The world is likely to find after spending trillions of dollars and euros that climate change has been unaffected.

Saturday, December 19, 2009

The UN Climate Change Conference ended in failure. The last-minute accord negotiated by the US, China, India, Brazil and South Africa, after most world leaders had left on December 18, was in no way binding. It was, in the words of The Independent, a British newspaper, "merely a political statement."

China was willing to assist a western economic suicide, but was not interested in participating. The Independent explains how China killed the agreement by refusing to compromise:

The day's most remarkable feature was a direct and unprecedented personal clash between the US President, Barack Obama, and the Chinese Premier, Wen Jiabao, in which Mr Wen took deep offence at Mr Obama's insistence – in public – that the Chinese should allow their promised cuts in greenhouse gases to be internationally verified. When the President, in an unyielding speech, said that without international verification "any agreement would be empty words on a page", that was too much for Mr Wen. He left the conference in Copenhagen's Bella Centre, returned to his hotel in the city, and responded with a direct snub of his own – he sent low-level delegates to take his place in the talks.

A high-level source told The Independent that the US President was amazed when he found who he was negotiating with, and clearly regarded Mr Wen's absence as a major diplomatic insult. He snapped: "It would be nice to negotiate with somebody who can make political decisions"...

In the meantime, as physicists have recently determined, the earth will continue to warm and cool in response to changes in solar activity and cosmic ray inflow, with CO2 playing a minor role, if any.

Perhaps President Obama would have found the sun to be a more tractable negotiation partner than China. In fact, the sun is actually cooperating -- its geomagnetic emissions are at an all-time low right now, as predicted by an excellent 2005 study (Sunspots may Vanish by 2015) by two scientists, William Livingston and Matthew Penn, at the National Solar Observatory in Arizona.

Physicists have found close correlations between cosmic ray influx and global temperatures and they know that solar activity blocks cosmic ray influx. The current hypothesis is that when solar activity is low, more cosmic rays penetrate the earth's atmosphere, causing more low-level clouds to form, reflecting more sunlight back into outerspace, and thus cooling the Earth.

Friday, December 18, 2009

As the UN Climate Control Conference comes to an end today, many issues remain to be negotiated, including the size of the emissions cuts and the future of the Kyoto treaty. But one issue has already been settled: the size of the reparations that the developed countries (United States, Europe, Japan, etc.) would pay to the developing countries (China, India, Africa, etc.) if the agreement is negotiated.

The total reparations would be $30 billion per year in 2012, rising to $100 billion per year in 2020. Secretary of State Hillary Clinton told reporters yesterday that the United States would pay $10 billion of the $30 billion per year by 2012. Thus the U.S. share of the $100 billion by 2020 would be $33 billion per year.